III - ECONOMIC OUTLOOK 1997-98

Summary

Cyclical Slowdown

To some, 1996 was the year of reckoning for the economies of the Association of Southeast Asian Nations (ASEAN): after a decade of exceptionally high growth, the region appeared to be running out of steam and was finally slowing down. In countries like Singapore and Thailand, the slowdown turned out to be much sharper than expected, sparking concerns about the health of the underlying fundamentals.

Sceptics of the so-called ‘Asian miracles’ are quick to paint a doomsday scenario, pronouncing 1996 the beginning of the end of ASEAN's high growth era. They contend that the problems faced by ASEAN are structural in nature, not cyclical, and therefore cannot be resolved within a few years. Manifestations of structural illness, they claim, are there for all to see: productivity is low; most industries remain labour-intensive; there is insufficient capacity in these economies for technological change and innovation, and the constraints posed by the infrastructural bottlenecks are insurmountable.

The issues should be seen in perspective. Admittedly, some evidence of these ‘structural’ symptoms exists, but similar obstacles are found elsewhere too. Structural problems are part and parcel of any growing economy. ASEAN economies have been confronted with the challenge of upgrading their industrial structures since the early 1970s. They will continue to face the same challenges as long as they keep growing, even if the exact nature of the problems differ. The slowdown in 1996 was largely cyclical, with a small structural component. Indeed, structural downturn, almost by definition, does not happen overnight. The fact that exports dropped so abruptly in some ASEAN countries last year supports the view that the downturn was driven primarily by cyclical changes.

Changes in both external and domestic conditions converged to bring about ASEAN's cyclical slowdown in 1996. With the potential growth rates in most economies estimated at no more than 7.5 per cent, it is hardly surprising that the production capacity should exhaust itself and that overheating pressures should start to build up, after two years of near double-digit growth. This alone would have been enough to put a brake on the region's growth momentum temporarily.